Solar Power Plant Evaluation – What are the government policies applicable to the power plant? How/will this impact the returns from the solar power plant?

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Solar Power Plant Evaluation – What are the government policies applicable to the power plant? How/will this impact the returns from the solar power plant?

Government policies and approvals are very crucial when it comes to the smooth running of the power plant along with the financial feasibility of the project. This is the most critical aspect for the financial returns for your power plant, if it is under the sale to utility model. Before you invest in a power plant, you might want to go through the below aspects to de-risk yourself from policy changes and its negative impacts on your financial returns:

Go through the PPA(Power Purchase Agreement) thoroughly

The most important criteria you might need to know is the PPA term and PPA rates attached to the agreement. You should have read and understood the PPA terms for the power plant thoroughly. For example, the PPA might stipulate the penalty clauses for over or under performance of the power plant in terms of generation. Going through the PPA terms will also be required for you to gain an understanding of the loss factors taken into account for receivables from the utility, the unit charges for auxiliary consumption of the power plant, the clauses citing the meters from which the generation will be recorded. You might also want to be aware of the technical specifications and standards prescribed in the PPA and absolutely comply with it.

PPAs could be subject to tariff revisions

In some cases, the PPA itself would be only for a short period of time and the tariff rates could be subject to revisions after the pre-defined time period. You may have to brace yourself for such tariff revisions which most likely negatively impact your financial returns. In most cases, the revised tariffs would be lower and in accordance with the current capital costs for a solar power plant.

In some rare cases, the utility can revise the tariff at which it will buy power from you, even if the clause is not mentioned in the PPA. This has happened in Gujarat in 2014. The state-run utility, Gujarat Urja Vikas Nigam Ltd. (GUVNL), a reduction of PPA tariff rates from Rs.15 per unit to Rs.9 per unit under the claim that the capital costs incurred by the investors for the power plant was lower than. However, fortunately for the PPA holders, the appellate tribunal shot the claim down citing that PPAs could not be reopened.

Financial health of the DISCOM

Some State DISCOMs could be riskier that others in the context of power plants with PPAs signed with them. Poor financial health of DISCOMs is consistently cited by industry commentators as a major barrier for the solar industry in India. It means they are less willing to take on electricity produced by solar power projects or in some cases delay payments to the developer. You might want to critically evaluate the financial health of the relevant DISCOM with which your plant has a PPA, to ensure that there is sufficient off-take for the generation from the plant.

Make sure the PPA can be legally transferred

In case of the purchase of a solar power plant along with its PPA, make sure you read (if possible, re-read) the terms and conditions cited by the off-taker. You might want to ensure that a legal transfer of the PPA is allowed before you plan your investment decisions

Understand the terms and clauses associated with applicable open access charges

If the business model of the solar power plant is based on sale to third-party, it will have terms for how the current seller and off-taker are to share the open access charges – the additional charges applicable for using the utility lines for power transfer. These open access charges usually consist of wheeling, transmission, cross-subsidy, deemed demand charges, reactive power losses, etc. The government policies regarding these could change with time. You might have to brace yourself against an impact on your financial returns with policy changes.

Benefits claimed by the project

You should be aware of the government incentives as applicable to the solar power plant. These incentives may include capital subsidies and accelerated depreciations. Now when you buy out an existing power plant, these incentives may not apply to you or could change according to government policies, even if the benefits are unclaimed, making it less attractive to you. Additionally, government policies on applicable taxes and duties also are subject to change.

You might want to check out these questions on Solar Power Plant Evaluation – Terms and Conditions